Suspicious Binds

At least one Chinese entrepreneur is pleased with Barack Obama’s re-election. “Our defendant is still around; otherwise, I would have worried,”Liang Wengen, chairman of Hunan-based heavy machine producer Sany and one of the richest men on the Chinese mainland, said during a recent press conference in Beijing.

Ralls Corp, Sany’s American subsidiary, has filed a lawsuit against President Obama and the Committee on Foreign Investment in the United States (CFIUS) at the district court in Washington DC. The company claims that the Obama administration collaborated with the CFIUS to illegally block Ralls’ acquisition of a wind farm near a US navy testing site, citing concerns over national security.

“We will fight to the end,” Liang pledged.

Prejudice

While Sany is pursuing a lawsuit against the US presidency which few expect to suc- ceed, two other vast Chinese conglomerates- telecommunications equipment manufacturers Huawei and ZTE - have finally had to give up on their mutual dream of entering the US market. In October, Congress concluded that using products manufactured by either company in the continental US telecommunications network “could undermine core US national security interests.”

Even bankrupt nations are resisting investment from China. Across the Atlantic in Iceland, another prominent figure on the Forbes China Rich List, real estate tycoon Huang Nubo, chairman of Beijing’s Zhongkun Investment Group, has been kept waiting on the “schedule of the Icelandic government.”After being given the brush-off by the Icelandic authorities when he attempted to purchase a large tract of land in the country for development as a tourist resort, Huang attempted instead to obtain a 99-year lease on the same area. However, as of October, the Icelandic government had yet to sign off on the lease, citing national security concerns.

The reason for this distrust of Chinese enterprises looking to establish a physical presence on foreign soil is that the distinction between commerce and politics, blurry across the globe, is particularly obscure in China. Huawei founder and chairman Ren Zhengfei, Liang Wengen and Huang Nubo all have documented ties, past and present, with the Communist Party, leading to speculation that their businesses are at the beck and call of the Chinese authorities. Although China’s State-owned enterprises (SOEs) have traditionally been the principal targets of such distrust, some nominally independent Chinese companies, particularly those involved in strategic industries, are now facing a similar degree of prejudice.

This does not mean that all Chinese enterprises struggle to gain a foothold overseas indeed, the vast majority, whether private or State-owned, are welcomed as essential partners boosting struggling economies.

Take the example of Sinopec, one of China’s three State oil monopolies, a company which supplies 60 percent of China’s oil products. Sinopec announced at least two acquisitions of US and British North Sea oilfields in 2012, putting Chinese investors in charge of major strategic resources in both countries. During a visit to Beijing in September, Polish Foreign Minister Rados?aw Sikorski openly requested greater Chinese involvement in Poland’s nascent shale gas extraction program.

Why are some Chinese companies faced with obstructions wherever they go while others, even State-owned monopolies, receive the red carpet treatment?

As with most issues which interfere with the routine of international trade, the roots of disagreement are nourished by more than just partisan politics.

Selective Welcome

“Recently the UK government was showing potential Chinese investors around our nuclear power stations,” said Peter Manning, head of international trade with Essex County Council. His Nanjing office works closely with the Jiangsu provincial government to attract Chinese companies to eastern England. He added that both Huawei and ZTE already had several operations in the region.

Manning is in a unique position to evaluate the respective strategies of Chinese businesses attempting to go global. One problem which he believes continues to dog Chinese investors is the failure of Chinese entrepreneurs to adapt to an unfamiliar business culture.

“With the Chinese competitive model in their minds, [Chinese investors] could position themselves incorrectly in the market, focusing perhaps on being a low-cost leader rather than a quality brand,” Manning told our reporter.

Some business figures in China have noticed this problem, and are seeking to solve it. A consortium of about 200 members of the Aigo Entrepreneurs Alliance, an elite club of top Chinese private entrepreneurs interested in a global strategy, has been touring Europe, Southeast Asia and the US over the past few months. Feng Jun, initiator of the club and chairman of Aigo Digital Technology, told NewsChina that the delegates were impressed by the warm reception extended by business communities and governments in all the countries they visited.

More than 80 percent of Chinese companies with an overseas presence described the business environment in their host countries as “fair and friendly,” according to a survey released in April by the China Council for the Promotion of International Trade (CCPIT).

However, sometimes investors are surprised by the sudden appearance of trade barriers, even in countries famed for their openness to Chinese investment.

Australia is a good example of this. China was Australia’s 13th largest source of investment by the end of 2011 according to a white paper published by the Gillard administration on October 28. China owns major stakes in Australian fossil fuels and mining concerns, and while tensions have flared over environmental and tax issues, the business relationship between the two countries has continued to boom. However, Huawei executives were left reeling when their company was slapped with a ban preventing it from bidding for Australia’s national broadband program.

Canada, another major destination for Chinese investment, has also attempted to selectively obstruct Chinese acquisitions in its domestic oil industry. Ottawa has repeatedly delayed finalizing the acquisition of Canada’s Nexen by the State-owned China National Offshore Oil Corporation (CNOOC). A number of high-profile fraud cases involving some small Chinese companies listed in Canada were cited as a reason CNOOC found itself under particular scrutiny from regulators.

“There is concern that Chinese SOEs may pursue national strategy over commercial interests, even if many SOEs are listed on overseas markets,” a Beijing-based consultant specializing in globalization told our reporter.

The US government, while outwardly inviting foreign investment to boost its reindustrialization and as pivot to high-tech industrial manufacturing, remains vigilant when it comes to potentially troublesome competitors entering its domestic market. Professor Sang Baichuan of the University of International Business and Economics told NewsChina that, by keeping Huawei out, the US is attempting to avoid having to extricate the Chinese giant from its telecommunications network in the future. Most analysts agree that it is easier to keep a company out of a market in the first place than to remove them once they have become established.

At a press conference in October, Chinese Commerce Ministry spokesperson Shen Danyang urged the US to “return to the right track,” citing the much slower growth of Chinese investment there than in most other major economies for the first three quarters. Han Xianbao, chairman of the Henan-based crane manufacturer Weihua Group, told our reporter that he sees Sany’s cold shoulder treatment at the hands of the Obama administration as a learning opportunity for his own company’s global strategy.

The Pizza Hypothesis

A key millstone round the neck of Chinese entrepreneurs is that few can claim no past or present association with the government. Quite apart from the direct involvement of the Communist Party in the management and oversight of business, many of China’s top earners made their fortune after giving up government jobs and entering the business market in 1992 in response to pro-reform remarks from then-leader Deng Xiaoping.

This so-called “92 group,” comprised of former soldiers, cadres and civil servants, has gone on to dominate countless sectors of Chinese industry, from soft drinks manufacturing to property and finance. If a CEO’s past or present association with the Communist Party is seen by foreign regulators as reasonable grounds to block investment or acquisitions, few of these companies would be able to confidently present a clean record.

Even in sectors dominated by private interests, the hand of the Chinese government can be a hindrance as often as a help, at least in terms of developing a global market share. Chinese solar panel exporters, mostly private enterprises, receive generous subsidies from Beijing as part of the government’s green energy drive. These subsidies, which have propped up an industry already struggling to compete in a saturated domestic market, are what have allowed the US to accuse Chinese solar panel manufacturers of unfair trade practices.

More important, in an economy where the State has a strong grip on market resources, from finance to energy, and a final say over which enterprises are permitted to enter the marketplace, it is almost impossible for companies to survive and thrive without good connections with the government.

Professor Sang believes that the only viable solution is to reduce or even eliminate government involvement in the management and operations of private businesses. Others advocate stronger and more open diplomatic ties with key partners like the US and EU, in order to foster a greater level of mutual political tolerance and understanding.

Chinese investors themselves also need to adjust their business practices for the global marketplace. SOEs have so far struggled to convince prospective partners that they genuinely practice modern corporate governance, at least in their overseas operations. Consultants also advise a scaling-back of ambitions rather than constantly pushing for 100 percent buyouts of overseas competitors, which looks like an attempt at establishing monopoly powers. Chinese companies should learn to live with smaller stakes and focus on cooperation with international partners, they say.

Bosideng UK, a China-funded, Londonbased menswear retailer, found themselves in a very complicated and different legal system when they landed in London. After carefully negotiating England’s labyrinthine planning laws in order to acquire a property near London’s Bond Street to house their flagship store and offices, executives found they had to compensate three parties in a neighboring building for their loss of “rights to light,”due to their decision to add an extra three stories to the existing structure. This was a wake-up call for a company used to doing business in China, where entire residential communities are routinely or bulldozed in a matter of hours to make way for developers, with former residents entitled to meager, if any, compensation.

“Forget about the personal connection-oriented mindset that often works in China, always follow the rules and resort to local professionals, lawyers, surveyors,” said Wayne Zhu, CEO of Bosideng UK. “Then everything is not as difficult as expected.”

Feng Jun, initiator of the Aigo Alliance and chairman of Aigo Technology Co., is vigorously touting his concept of turning Chinese business culture from “baozi” meat-stuffed steamed buns popular in his home country -to “pizza.”

The biggest difference between them, he explained, is that one keeps its “meat” hidden, while the other displays it in the open. “Most Chinese private companies deal in consumer products, which means everyone can see what we make, and that we face our customers directly,” he told NewsChina. “This means we are born to be better prepared than SOEs people can see us, and thus trust us.”

Feng identified this transformation as the biggest challenge for Chinese investors when it comes to building confidence in host countries. He believes this stems from a fundamental cultural difference, which prejudices Chinese people against strangers who appear to wear their hearts on their sleeves. He believes that voluntary commercial organizations like the Aigo Alliance can help to inform as well as protect investors when entering the global marketplace, helping Chinese business leaders, like Olympic athletes, learn to do business rooted in teamwork, openness and respect for the law. He calls this notion his “Olympic model.”

The globalization of Chinese businesses remains in its infancy, which makes teething problems inevitable. While both Chinese investors and their foreign partners may express a desire for greater understanding, there remains the issue of who backs down first. Unless this problem is resolved, regardless of how shaky the global economy continues to be, it will be tough for either side to reap the full rewards of a more internationalized and perhaps less politically isolated Chinese business community. ?